Page 6 - 17. COMPILER QB - INDAS 110

MTPs QUESTIONS

Q4. (Oct. 19 – 5 Marks)

Tee Limited is carrying on the business of developing lightweight and medium weight guns for the Indian
defense industry. Tee Limited acquired 48% of shares in Kay Limited, a company engaged in advanced
research in weapons. Tee Limited acquired shares in Kay Limited to substantiate their position in the industry.
The remaining 52% of shares are held by the key management personnel of the Company Kay Limited. The
Kay management consists of eleven people who are experts in the fields of advanced weapons and the core of

the Company.
Tee Limited has the option to purchase the remaining 52% at any time by paying 6 times the market price
of the share. But on purchase of the shares it is highly possible that the key management personnel will leave
the company.
1. State whether Tee Limited has control over Kay Limited.
2. What would be your answer if Tee Limited had 51% of shares in Kay Limited and Kay Limited could start

the research, development and production of weapons only with the stringent approval process of the
defense ministry of the Central Government.
SOLUTION

As per Ind AS 110, an investor controls an investee if and only if the investor has all the following:
1. Power over the investee:
Further, as per the standard, an investor has power over an investee when the investor has existing rights that
give it the current ability to direct the relevant activities, i.e. the activities that significantly affect the

investee’s returns.

2. Exposure, or rights, to variable returns from its involvement with the investee
As per the standard, an investor is exposed, or has rights, to variable returns from its involvement with the
investee when the investor’s returns from its involvement have the potential to vary as a result of the

investee’s performance.

3. The ability to use its power over the investee to affect the amount of the investor’s returns
An investor is exposed, or has rights, to variable returns from its involvement with the investee when the
investor’s returns from its involvement have the potential to vary as a result of the investee’s performance.

The investor’s returns can be only positive, only negative or both positive and negative. - same as point 2?

Based on the above guidance, following can be concluded:
(a) Tee limited has acquired 48% in Kay Limited. The purpose of acquiring the shares by Tee limited in it is
to substantiate their position in the industry. Kay Limited is a specialist entity that is engaged in advanced

research in weapons. Acquiring Kay Limited will help Tee limited to gain access to their research which would
complement Tee Limited’s operations and business of developing light weight and medium weight guns.
The key management personnel who hold 52% shares of Kay Limited are key for running Kay Limited’s
business of advanced research and will help Tee limited to acquire the market through groundbreaking
advanced researches of Kay Limited. In case of acquisition of 52% stake of Kay Limited, the key management

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